Amendments to tax law expected to stimulate the economy

Customs tax and VAT on certain production equipment to be deferred On May 27, Parliament called an irregular plenary meeting to consider tax laws and transfer the Bills to first discussion. The Government and Parliament believe that these tax laws can stimulate economic growth and give impetus to recover from the present economic difficulties. Parliament made a decision to give support through five kinds of tax and six kinds of non-tax measures to investors under the Investment Law. As such, it is necessary to amend relevant tax laws in order to realize the tax and non-tax exemptions. Therefore, the government submitted its first two completed Bills to Parliament. Article 11.2 of the Investment Law reads, “Imported techniques, facilities and equipment shall be exempted from customs tax for the period of construction work for building plants of construction materials, oil, agricultural products and products for exporting, nano, bio and innovation technology plants, power plants and railways”. Accordingly, the government proposed to defer the payment term of customs tax and VAT on importing techniques and facilities of abovementioned purposes for two years. MPs expressed their entire support for this Bill. They stressed the necessity to accurately study the scope that these tax exemptions will have and the load it will have on the State Budget, because there has not been any preliminary estimation on what projects will be involved in the exemptions and the amount of tax payments to be deferred. Finance Minister Ch.Ulaan explained, “Besides equipment and facilities of appropriations as stated in the Investment Law, techniques and facilities that will be exploited in the country’s major projects will be involved in the tax exemptions. It is impossible to preliminarily estimate at this time since the state investment program has not been adopted.” However, a huge amount of taxation is likely to be deferred if the Bill is approved. The Cement Plant at Olon Ovoot deposit in Dornogobi Aimag is currently in a difficult situation to pay taxes of Tgs19.4 billion for its equipment worth 43.5 million Euros; thus they requested to defer the tax payment”, said Mr. O.Ganbat, chief of the General Customs Department. Construction and Urban Development Minister G.Bayarsaikhan said that big cement plants are facing the same problem. The government considered that amendments to the Customs Tariff and VAT laws can be effective to complete any construction works on time and prevent possible technical breakdowns as well as save on operational costs during the construction process by 15.5 percent. In the Investment Law, it was stated to exempt techniques and facilities from customs tax during the construction period. But the government proposed to defer the tax for two years. Finance Minister explained, “Taxation must not be deferred by an uncertain or limitless period. On the other hand, the given term will be an impetus to complete major projects within a shorter period”. MPs suggested that the government work-out and submit a package of Bills on tax and non-tax exempts and reductions for investors within a short period. MP L. Enkh-Amgalan said, “If an investor invests over Tgs500 Billion, they will have right to establish an investment agreement. If we involve investors who established the agreement, just two or three investors would be involved in the exemptions. Therefore, investors who obtain a Stabilization Certificate should enjoy the exempts”. MP S.Bayartsogt expressed his position, “This law just focuses on changing the tax payment graphics of companies and not create a tax burden that pressures the State Budget; thus it will be helpful and well-timed support.” SME equipment is to be exempted from customs tax and VAT MPs support providing customs and VAT exemptions on equipment and facilities being imported for the purpose of small and medium-sized enterprises until December 31, 2016. Parliament adopted the Law with exactly same meaning on July 16, 2009, which was valid until December 31, 2013. Due to complication in the economy, the government considered it necessary to continue this tax regime and work-out the Bill. “Actually, the government was not intending to continue the tax exemptions further, but was planning to support SMEs by means of a 90 percent of VAT reimbursement instead. However, the present external and internal economic situation applies significant pressure on the State Budget and companies. If capabilities of companies are used up in order to not reduce State Budget revenue, the economy will get worse. Therefore, the Bills have been worked out to provide an opportunity for SMEs to maintain their normal activities and jobs and enhance their businesses as well as intensify the nation’s economy,” explained the Finance Minister. Within the previous law on customs and VAT exemptions, the government approved and enforced a resolution on tax exemptions for 789 kinds of equipment, facilities and spare parts in 33 directions that are used by SMEs. A number of enterprisers who were involved in tax exemptions and the amount of tax exemptions increase year by year. In 2009-2011, tax exemptions worth Tgs22.6 billion were rendered for SME equipment worth Tgs145.7 billion in total, owned by 1,942 individuals and companies. Tax exemptions worth Tgs33 billion were rendered in 2012. About 2,000 enterprises received tax exemptions worth Tgs23.7 billion in 2013. The government believes that the tax exemption stimulated SMEs to modernize techniques and technology, improve the quality and standards of their products, and advance competitiveness. In the past three years, equipment for sewing, water, printing, nano, bio-technology, food and construction materials were mainly imported. It evidently shows that production in these sectors has higher growth. On the other side, more than 45 percent of businessmen in rural areas manage trade and service activities, and half of them are interested in buying production equipment. According to the corporate income tax report, there are some 66,500 economic entities operating in Mongolia, of which about 90 percent are small and medium-sized enterprises, employing up to 20 workers. Some 10-20 percent of these SMEs have modernized their equipment in recent years while some 80 percent are required to modernize and expand their production. MPs expressed their total support to exempt SMEs from taxes and requested the government to realize a comprehensive policy to promote SMEs, close-out those who import equipment for commercial purposes from the possibility to be involved in the tax exemptions, and not only pay attention to involving SMEs in managing productions, but those involved in services as well. MP O. Baasankhuu said that although income that comes from SMEs paying taxes make up a very little part of the budget revenue, SME activities have a significant impact on the country’s economy, thus they should be entirely exempted from taxes until they fully develop. But the Finance Minister had an absolutely opposite position. “In view of the economy, every citizen must be a tax-payer. The basis of the taxation must ensure a wider, more reliable and incremental foundation. Tax exemptions and reductions cover a wider scope. Currently, over 450 kinds of tax exemptions and reductions are in effect. Tax payments equaling 30 percent of the budget revenue are being exempted and reduced annually including most construction projects. We need to further arrange tax exemptions and reductions by policy,” said Finance Minister Ch. Ulaan. Under the law, taxation laws must be amended when the State Budget and budget adjustments are discussed. Nevertheless, the government has a position to bring the amended Law on customs and VAT exemptions for SME equipment into force from the day of approval. Even MPs support this position. It is presumed that in 2014, customs tax and VAT worth Tgs25 billion will be exempted thanks to adopting the law. SMEs can get a soft loan from the SME Promotion Fund and Soum Development Fund that has capital worth Tgs322 billion or receive a loan guarantee through Credit Guarantee Fund. Bill on two-percent reimbursement of VAT under discussion Within the second-phase tax reform, the government submitted a revised Bill on Value-Added Tax (VAT) to Parliament. “Within the first phase reform of the tax realized in 2007, the principle of four ‘10’ (rates of four kinds of taxes including VAT, corporate income tax will be at 10 percent) was introduced in Mongolia. It was a well-timed solution which has been fine-tuned with conditions and requirements of that particular time and stimulated abrupt economic growth. As much as the changes occurring in social and economic relations, some clauses and provisions of taxation laws and legislation became insufficient to regulate newly coming requirements, conditions and relations. “It tends to produce a diversity of understandings and inconsistence as well as quarrels between taxpayers and the tax administration. Hence, it is essential to have a tax policy that supports taxpayers and businessmen in certain spheres by means of implementing purposes and objectives stated in the action plan of the government, build a business-friendly environment, create a stable taxation environment that fully meets taxation principles to be easy, understandable and equal, irreversibly fosters economic growth, and is in harmony with international standards,” said Ch. Ulaan. The revised Bill’s main amendments that are different from the existing law is that companies and individuals who have annual income of over Tgs50 million shall pay VAT and that 2 percent from the 10-percent VAT shall be reimbursed to the taxpayer. “The threshold of VAT was Tgs10 million in 1998. Considering changes in inflation levels, international methodology to estimate VAT threshold and expenses in collecting taxes, the VAT threshold was decided to be Tgs50 million. Two percent of the VAT payment will be reimbursed with the purpose of encouraging VAT payers or buyers to register and control their purchases,” said Ch. Ulaan. “In other words, it is possible to control whether businesses make their reports of sales and taxation properly with help of VAT, but this control system was unsuccessful in the past years. Therefore, it aims at making the mechanism effective by means of reimbursing certain part of the taxation. In the present practice, infringements to get exempted from taxation by using fake invoices are commonplace. As an acting commissioner of General Taxation Department T.Batmagnai said, 38 economic entities were discovered to sell fake invoices to others to get exempted from taxes equaling Tgs502.7 billion in 2012-2013. Some economic entities were granted the possibility to correct their false tax reports and added taxes worth Tgs29 billion to the State Budget. The VAT reimbursement also aims at encouraging non-cash transactions and unfolding a shadow economy. A major part of the shadow economy is cash transactions. When making payments by bank cards, purchases of that economic entity are recorded, which will ensure it receives a VAT reimbursement. It is believed to unfold the shadow economy to a much greater scope. Moreover, this mechanism will create a possibility for taxpayers to receive their reimbursement directly without declaring their tax reports. Therefore it will be easy for taxpayers. In 2013, Tgs574.4 billion was accumulated from VAT, of which Tgs74 billion was reimbursed. Although two-percent VAT reimbursement will increase the amount of money to be reimbursed, it is hopeful it can be recovered with money from the disclosed shadow economy.